Hotel And Motel Loans

USDA Business and Industry Guaranteed Loan Program – Motel and Hotel Financing

Hotels & Motels are eligible for B & I Loan assistance due to their important role in economic development of rural communities and because recreation & tourism are often a key rural business sector.

Underwriting Standards:
Motels and Hotels must meet all the normal B & I Loan standards. In addition, because they are single-use, special purpose facilities which are particularly vulnerable to economic downturns caused by high gas prices, etc., added strength is generally required as outlined below:

Collateral:

Up to 80% LTV (max) on Real Estate is the normal standard because they are special purpose facilities.

Up to 85% LTV (max) on Franchised Real Estate is acceptable because of the added benefits of the franchise.

25% LTV on the Furnishings, Fixtures, & Equipment (FF&E). Motel FF&E is very depreciable and had limited saleability if removed during liquidation. Loans on motels & hotels should always be collateralized by both the real estate & FF&E, since the two are integrally related. A first lien position on both is important. If another lender holds a prior lien on either the real estate or the FF&E, additional discounting of the LTV is appropriate.

Collateral Analysis should use the current, “as improved” fair market value of the property.

The value of the FF&E should be broken out separately from the value of the Real Estate

Feasibility Study:

Feasibility Studies are required on all new motel & hotel projects. They must be separate & distinct from the real estate appraisal and prepared by independent consultants with an established expertise in the hospitality industry.

The feasibility study should include detailed information of Supply, Demand Analysis, Occupancy & Average Rate Analysis, & Net Income Forecast.

Loan Term:

Loans for Real Estate purposes may extend up to 30 years.

Loans foe FF&E should not exceed the useful life of the furnishings – – 7 years.

A Blended term in a blended loan is permitted.

Income Statement Analysis:

Depreciation is a real expense, so adequate provisions should be made for regular repairs and upgrades.

Loan Agreement:
If the motel/hotel is a franchise, the loan agreement should require the borrower to maintain the franchise flag. Loss or termination of the franchise without the lender’s consent would constitute a non-monetary default.

Loan Conditions:
If the motel/hotel is a franchise, a “comfort letter” should be obtained from the franchisor stating that the franchise will maintain its flag on the property during liquidation.